Are Affine Volatility Restrictions Still Costly when the Pricing Kernel is Quadratic?

33 Pages Posted: 14 Aug 2019

Date Written: July 14, 2018

Abstract

I compare the quadratic kernel used by Christoffersen, Heston and Jacobs (2013) with the commonly used Rubinstein's (1976) power pricing kernel in terms of option valuation performance. I do so in both affine and nonaffine GARCH(1,1) models. I find that, in both cases, the quadratic kernel outperforms its linear counterpart. I find no evidence that the performance gap between the affine and the nonaffine models shrinks with the quadratic kernel.

Keywords: GARCH, pricing kernel, stochastic volatility

JEL Classification: G12

Suggested Citation

Aoun, Patrick, Are Affine Volatility Restrictions Still Costly when the Pricing Kernel is Quadratic? (July 14, 2018). Available at SSRN: https://ssrn.com/abstract=3435824 or http://dx.doi.org/10.2139/ssrn.3435824

Patrick Aoun (Contact Author)

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada

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